Bank Income Smoothing, Institutions and Corruption

Abstract

This study investigates bank income smoothing, focusing on the effect of corruption on the extent of income smoothing by African banks. I find that banks use loan loss provisions to smooth positive (non-negative) earnings particularly in the post-2008 crisis period and this behaviour is reduced by strong investor protection. Also, I find that banks in highly corrupt environments smooth their positive (non-negative) earnings as opposed to smoothing the entire profit distribution. Finally, cross-country variation in bank income smoothing is observed. The findings have implications.

Keywords: Loan Loss Provisions, Earnings Management, Investor Protection, Corruption, Income Smoothing, Banks, Profitability

JEL Classification: G21, M41, O55, N27, K41